The surprise deal, quietly announced Christmas Eve, brings a halt to her $8.85 million lawsuit against the government.

McDougald, who earned $400,000 a year, was sacked Aug. 31 with no severance following an expense scandal at the Crown corporation when the government was already in hot water over excessive spending at eHealth Ontario.

At the time, Finance Minister Dwight Duncan vowed to "vigorously" defend the firing in court.

He could not be reached to explain the change in heart, but a government source called the settlement a good deal at less than 10 per cent of McDougald's multi-million-dollar claim.

"I'm pleased to have cleared my name and reputation and to have reached a satisfactory settlement without an extended court process," a cheery McDougald, who has not yet found a new job, told the Star in a brief interview as she prepared for the arrival of family for Christmas.

McDougald declined to comment on other components of the deal – no details were released – or when it was reached with retired judge Coulter Osborne acting as a facilitator between her lawyer Brian Grosman and the government.

New Democrat finance critic Michael Prue said the government released the settlement on Christmas Eve to avoid public scrutiny over the holidays.

He noted that if McDougald had been given a year's salary when she was terminated, taxpayers and Premier Dalton McGuinty's cash-strapped government struggling with a record $24.7 billion deficit this year would have saved almost $400,000.

"They are paying her our money for their incompetence," said Prue (Beaches-East York).

"It's the great Christmas giveaway."

Progressive Conservative Leader Tim Hudak said Ontarians won't be fooled by the government's attempt to sweep another scandal under the carpet.

McDougald alleged she was fired after refusing to sack the OLG's chief financial officer and one other senior employee – as demanded by Duncan – as part of a pre-emptive public relations strategy to make it appear the "boils are lanced" when embarrassing expense account details became public.

Although McDougald was not personally implicated in expense-account irregularities, the scandal included staff expensing lavish meals with alcohol and one employee's $30 car wash reimbursed without an official receipt. Some incidents took place before McDougald was hired as lottery boss in 2007 following previous troubles at the corporation.

In her statement of claim, which was never proven in court, she portrayed herself as a political scapegoat for a government feeling the heat over the spending scandal at eHealth, where lucrative contracts were awarded without competitive bidding and consultants who were paid as much as $3,000 a day expensed tea and chocolate chip cookies to taxpayers.

"Time and time again, Dalton McGuinty has shown he has no accountability or regard for taxpayer dollars," said Hudak.

"This settlement is 100 per cent more than what McDougald was entitled to under her contract. McGuinty's pattern of dodging responsibility continues."

In her claim, McDougald said she offered to resign if she was paid a year's severance – and that Duncan knew the scandal was about to blow because the government was aware of Conservative freedom-of-information requests on politically embarrassing OLG expenses.

She disputed there was cause to fire her, saying a lawyer she consulted on behalf of OLG determined there were not grounds to fire any of her executive team as Duncan ordered.

The suit alleged Duncan told her "the expense reports are unacceptable ... and the government does not want to deal with this negative publicity."

When McDougald was fired, the government was already reeling from the eHealth revelation and for paying the agency's former chief executive Sarah Kramer $317,000 in severance.

As well, the fall sitting of the Legislature was about to resume and the OLG crisis was sure to be further fodder for opposition attacks. The government was also facing a by-election test in the riding of St. Paul's to replace former Liberal MPP Michael Bryant.

The lottery corporation previously ran afoul for a high number of "insider" wins by store clerks and for a contest that gave away foreign-made Mercedes Benz cars while Ontario-based automakers General Motors and Chrysler were foundering and seeking lifelines in the form of government aid.

OLG is now on the list of government assets that two investment banks, Goldman Sachs and CIBC World Markets, are examining for possible privatization as the Liberals confront their massive deficit.

As reported in the Star last week, sources say the government has been thinking of ways to unload the lottery business for some time.

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